Valuation - As a buyer of assets the most important screening characteristic is low price-to- book value. Investing in companies with low price-to-book has been proven by numerous academic studies to provide superior investment returns over a full market cycle. We focus on tangible book value as the primary valuation metric in our initial screening process eliminating intangible assets such as goodwill, patents, copyrights, etc. to provide a more conservative balance sheet analysis. We believe our tangible book value focus provides a greater margin of safety or lower downside risk control than p/e, p/s focused investment processes.
Quality – As an asset buyer one way to minimize security risk is to avoid heavily leveraged companies by requiring strong balance sheets. One of the biggest risks to a company that has fallen out of favor is their ability to survive if economic or industry conditions continue to worsen. High debt, for companies that are struggling, often exacerbates a bad situation. At precisely the time when management should be focused on improving operations, they are forced to deal with an overwhelming debt burden. Time spent finding a way to service the interest on the debt, renegotiating loan covenants and searching for refinancing takes time away from managing the core operations and increases the risk profile the company as well When high debt leads to bankruptcy it is the holders of debt, not the equity holders, which have seniority and control of the assets. To protect the assets or the book value of our investments we require companies to possess low debt-to-capital ratios. In many cases, our companies not only have little to no debt but have excess cash on the balance sheet. This allows them to increase shareholder value through share buybacks, dividend increases, and accretive acquisitions. Quality balance sheets provide the important luxuries of both time and flexibility to weather the storm and act as another element of risk control at the security level.
Catalyst – The majority of Signia’s research process is focused on the qualitative search for catalysts. It is relatively easy to screen for low price-to-book and low debt-to-capital. However, there is no easy way to screen for catalysts. Finding catalysts requires a lot of fundamental investigative work combined with a skill set built on experience. A company can trade at or below its book value, have little or no debt, and its price can still remain unchanged for a long time. This is the classic value trap. Signia requires that a company possess definable catalysts (company or industry) that will enable the company’s intrinsic value to be recognized. The more definable events or catalysts we can identify the greater is our conviction for the stock.